Tuesday, November 11, 2014

Though we're constantly reassured the "recovery" that's stumbled for five years has years of strong growth ahead, history suggests the "recovery" is due to roll over. Few recoveries last longer than 5 or 6 years, and the business cycle is graying fast: subprime auto loans are not exactly the foundation of "strong growth."

So what might push the economy over the cliff? The strong U.S. dollar is crimping overseas sales and profits, the global economy is already recessionary, mortgage applications have dried up, auto sales are being driven by subprime loans, and the valuation bubbles in stocks and real estate are due for a breather, if not an outright reversal. Retail sales are flat, and with all these headwinds, growing profits by 10% to 20% a year becomes impossible for the vast majority of enterprises.

So what happens to local governments when the economy rolls over? Tax revenues decline.

The consensus is that local governments are sitting pretty: sales and property values have risen smartly, pushing tax revenues higher, and the cost of borrowing money via tax-free municipal bonds has fallen. Nice, but these are all functions of expansion and rising tax rates.

The uneven nature of the "recovery" has left some cities and states more vulnerable to a downturn than others.Let's catalog the various risk factors that might become consequential as the global and U.S. economies weaken.

1. Those dependent on foreign tourism. The weak dollar made America a bargain destination for the past decade. As the dollar strengthens and other currencies lose purchasing power, America is no longer a bargain--especially as job cuts decimate the number of people who can blow a few thousand dollars on overseas vacations to the U.S.

2. Auto manufacturing-dependent locales. Vehicle sales have been strong, and the cheerleaders claim sales will keep rising for years to come. Really? With what money? As soon as layoffs hit the marginal workforce and the subprime auto loan bubble implodes, vehicle sales will follow suit.

3. Cities and states that depend heavily on capital gains taxes. Once the current housing and stock bubbles deflate--or simply stop expanding--tax revenues from the enormous capital gains reaped in the past five years will wither.

4. Locales dependent on high income taxes. Given that most of the job growth of the past five years has occurred in low-wage sectors, adding jobs hasn't boosted income taxes much. High income-tax states have jacked up rates on high-income earners, but there is no law of nature that says high-income jobs will survive a global downturn.

5. Local governments with enormous debt burdens. With interest rates low, municipalities and states went to the bond market over the past few years for "free money." Once tax revenues plummet, the interest on all that "free money" will take a larger percentage of tax revenues, heightening the cost of new bond debt as buyers start adding in the risk of eventual default.

6. Locales with high fixed costs. These include high healthcare costs for homeless, elderly, government employees, etc., interest on all those bonds, government employee pensions, etc. The fixed costs only increase every year, regardless of tax revenues. Every local government with high fixed costs is in a tightening fiscal vice once tax revenues plummet.

7. Local governments with generous employee benefits and pensions. Once the stock market rolls over, the big capital gains that have funded public pension plans dry up, and the annual contribution has to be paid out of declining tax revenues.

8. Local governments dominated by self-serving entrenched interests. That is, all of them: sclerotic, self-serving, entrenched interests resolutely refuse to accept any cuts in their swag. As tax revenues fall off a cliff, government managers will face a dilemma: they can't cut costs because the self-serving interests have made that politically impossible, and they can't borrow money for operating expenses.

That leaves defaulting on debt as the only choice left. And since that's the only choice left, that's what they'll do.

The vice will close on some cities and states sooner than others, but it will eventually squeeze every city and state with declining revenues and rising fixed costs into default.New video program with Gordon T. Long:

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.Test drive the first section and see for yourself. Kindle, $9.95print, $20"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)

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